Commerce Commission v Fletcher Challenge Ltd

IN THE COURT OF APPEAL OF NEW ZEALAND

CA33/00

UNDER

THE COMMERCE ACT 1986

BETWEEN	THE COMMERCE COMMISSION
Appellant

AND	FLETCHER CHALLENGE LIMITED
First Respondent

AND	FLETCHER CHALLENGE ENERGY LIMITED
Second Respondent

AND	ELECTRICITY CORPORATION OF NEW ZEALAND LIMITED
Third Respondent

AND	GENESIS POWER LIMITED
Fourth Respondent

Hearing:	24 July 2000
Coram:	Gault J Keith J Tipping J
Appearances:	J R F Fardell and K F Smith for Appellant W M Wilson QC and L J Taylor for First and Second Respondents J A Farmer QC and M R Dean for Third Respondent J A Farmer QC and A M Peterson for Fourth Respondent
Judgment:	31 July 2000

JUDGMENT OF THE COURT DELIVERED BY GAULT J

This is an appeal with leave from a judgment of Robertson J sitting in the Commercial List in which, after hearing applications to strike out parts of a statement of claim, he ordered the filing of a further amended statement of claim. As a condition of granting leave to appeal the Judge required the joinder of Genesis Power Ltd as fourth defendant and required that a strike out application made by that company, which he transferred to this Court, be dealt with at the same time.
The proceeding was commenced in December 1997 and the impression is inescapable that the parties are digging in for a major campaign with ultimate determination in any efficient manner presently obscured by costly skirmishes and strategies.
The Commerce Commission has formed the view that competition in certain gas markets is imperilled as a result of two acquisitions of interests in the Kupe gas field and contracts relating to the exercise of certain rights attaching to those interests. In the proceeding the Commission seeks to impugn this alleged anti-competitive conduct at every level and to visit upon all possible parties the maximum conceivable remedies. To that end, the fourth amended statement of claim, which is that to which the argument in this Court was addressed, comprises more than 270 paragraphs running to 41 pages. There are now four causes of action, two having earlier been struck out and no longer being pursued.
From the statement of claim it is possible to discern that companies in the Fletcher Challenge Ltd (FCL) group, which includes Fletcher Challenge Energy Ltd (FCE), in early 1997 acquired from other joint venture parties two shares in the Kupe gas field mining permit. A Fletcher subsidiary already held a 2.5% share. On 10 February 1997 the 20% interest of Norcen Energy Resources Ltd was acquired on exercise of a pre-emptive acquisition right. On 28 February 1997 Fletchers agreed with Electricity Corporation of New Zealand Ltd (ECNZ), a State enterprise, by the FCE/ECNZ agreement, to bid for and share the 40% interest of another of the joint venturers, Western Mining Corporation (NZ) Ltd. That was acquired on 14 March 1997 and the arrangement was effected by a Novation Agreement dated 27 March. By these acquisitions the Fletcher group share increased to 36.75%. ECNZ acquired a 25.75% share which, taken together with the 11% share held by the Crown, equalled the Fletcher share of 36.75%. By the FCE/ECNZ agreement, provisions of which relate to development of the Kupe field, and another agreement dated 28 February 1997 providing for long term gas supply from Fletchers to ECNZ (the Generic Gas Contract), in the context of other Fletcher and Crown interests in North Island gas production and supply, the Fletcher group is alleged to control the Kupe field and have an interest in controlling development and production. An “associated” company of the Fletcher group, Natural Gas Corporation of New Zealand Ltd, is said to have dominance in the gas wholesale, transmission and treatment markets but in a competitive environment would be constrained by the development and exploitation of the Kupe field. It is said Fletchers are in a position to prevent this as a result of acquiring control of the Kupe field.
Pursuant to an agreement dated 22 December 1998 Genesis Power Ltd, a newly established State enterprise created on the break up of ECNZ, acquired all of the direct and indirect interests of ECNZ in the Kupe field.
The first and second causes of action allege that the interconnected Fletcher companies contravened section 47(1)(a) and (b) Commerce Act 1986 by securing or strengthening dominance in the gas production and gas wholesale markets as a result of the “Kupe Acquisition”. The Kupe Acquisition is defined as together the Norcen purchase, the Western Mining purchase, the Novation Agreement and certain clauses of the FCE/ECNZ agreement.
It is also alleged that ECNZ and Genesis each were “party” to the contravention by the Fletcher companies. The relief sought under the first and second causes of action is central to the issues before us. The Commerce Commission claims:
(a)Orders pursuant to section 85 of the Act for the disposal by FCE, ECNZ and Genesis of all of their direct and indirect interests in the Kupe field above 2.5%, to person or persons unconnected or not associated with FCL, ECNZ, Genesis or any of their interconnected or associated companies.
(b)Orders pursuant to section 83 of the Act that FCL, FCE, ECNZ and Genesis pay to the Crown pecuniary penalties in the amount of $5 million each.
(c)Such other orders pursuant to section 84 as this Court may consider appropriate.
The third and fourth causes of action allege breaches of s27 of the Commerce Act in that provisions of the FCE/ECNZ agreement and the Generic Gas Contract have the purpose and effect of substantially lessening competition in certain gas markets. FCE and ECNZ are the contracting parties and are the alleged contravenors. FCL is alleged to be a party to the contraventions. Genesis, as assignee from ECNZ, is alleged to contravene because of the alleged likely effect of the agreement and to be a party to the alleged purpose contravention.
The relief claimed is a declaration that the contracts are unenforceable, injunctions under s81 and further penalties of $5 million each against FCL, FCE, ECNZ and Genesis.
The challenges to the pleadings have as their stimulus the claims for relief by way of orders for divestment under s85. The Commission, not content to claim orders for such divestment as will eliminate the alleged dominance (which must be the maximum extent of any such orders) seek to have the Fletcher interests divest all except the 2.5% of the Kupe field originally held and seek to have ECNZ and Genesis divest all interests (if any) directly or indirectly held in the Kupe field. That prompted strike out applications. The Fletcher defendants sought to prevent the Commission from amalgamating the Norcen acquisition with the Western Mining acquisition in the allegations of contravention of s47 so that only the Western Mining acquisition, the later of the two, by which the alleged dominance was actually acquired, would be vulnerable to divestment. ECNZ and Genesis, alleged to have been party to the Fletcher contraventions of s47, argued that the remedy of divestment is not available against them.
Just why it is necessary, by way of strike out applications, to test entitlement to particular remedies is not immediately apparent. Should it be held ultimately that a remedy is not available it will not be ordered. Nevertheless that is what underlies the issues before us.
Robertson J, in his judgment delivered on 5 August 1999, which was further to an earlier judgment given on 25 February 1999, ruled that there was no sufficient basis for treating the Norcen and Western Mining acquisitions together in the absence of any pleading that they were made pursuant to a wider scheme of acquisition. He held also that the power to order divestment does not extend to parties to s47 contraventions by others.
Mr Fardell, for the Commission, introduced his written submissions in these terms:
This appeal raises three important issues of principle:
(a)Whether parties to a breach of the Commerce Act 1986 (“the Act”) can be the subject of a divestment order under s85?
(b)In the event that divestment is available against a party to a breach of the Act, does the divestment remedy survive a subsequent assignment to a third party of the asset to be divested in circumstances where that third party is not involved in the alleged breach?
(c)Can the Commission for the purposes of establishing a breach of Part III of the Act, rely on an acquisition or transaction which does not, of itself, in the hands of the acquiring party, result in the obtaining or strengthening of dominance in breach of s47 of the Act?

Section 47(1) and 85(1) read:

47(1)No person shall acquire assets of a business or shares if, as a result of the acquisition, --
(a)That person or another person would be, or would be likely to be, in a dominant position in a market; or
(b)That person’s or another person’s dominant position in a market would be, or would be likely to be, strengthened.
…

85(1)In any case where the Court, on the application of the Commission, is satisfied that any person--
(a)Has contravened section 47 of this Act; or
(b)Has been found in any other proceedings under this Part of this Act to have contravened section 47 of this Act,--

it may, by order,--
(c)Give directions for the disposal by that person of such assets or shares as shall be specified in the order; or
(d)Give directions for the disposal by that person of any assets or shares in accordance with an undertaking given by the person under section 69A of this Act.

The three questions posed can be answered quickly, but they do not resolve all the real issues ventilated at the hearing.
Substantially for the reasons given by Robertson J, we are satisfied that a “party” to a s47 contravention by another cannot be subjected to a divestment order. Further, the divestment remedy for a contravention will not survive assignment of the acquired assets to a third party as an in rem remedy; it is expressly to be ordered against the designated contravening person. Further, it is plain that an acquisition which does not result in dominance or strengthening of dominance cannot contravene s47 so as to trigger the divestment jurisdiction. All that is evident from the plain words of the sections.
It is correct that s47(1) extends to an acquisition by one person as a result of which another person obtains or strengthens dominance in a market. The acquirer would contravene the section in such a case. But nowhere in the Act does it provide that persons who aid, abet, induce or are knowingly concerned in contravention by another person themselves contravene s47. There is no provision corresponding to s66(1) Crimes Act 1961. Persons who are “party” to contravention of s47 by another are expressly liable to pecuniary penalties (s83) injunctions (s84) damages (s84A) but not to divestment under s85. The omission of such provisions from s85 is stark, and understandable because the very purpose of divestment is to reverse the acquisition of market power by the contravenor.
We see no need to strain the plain words of ss47 and 85 to ensure they would catch deliberate divestment for the purpose of circumventing the power conferred by s85. If that divestment is to an unconnected or unassociated person the objective of divestment will be met. If it is not, the power will not be circumvented. To read in a power to follow assets and provide for orders in rem would create difficulties in the case of innocent purchasers when such an approach is unnecessary.
For the Commission the arguments were redirected. The absence of pleadings to the effect notwithstanding, it was said that in respect of the alleged parties to the Fletcher contraventions of s47 the other forms of relief (pecuniary penalties (s83) and injunctions (s84)) are pursued, but that the basis for relief by divestment is sought against them not as parties to the Fletcher contraventions but as contravenors themselves. This applies now only to Genesis which is said to have contravened s47 by acquiring the ECNZ interest in the Kupe field thereby perpetuating the Fletcher dominance. It was accepted that any question of divestment by ECNZ now is “moot”. Mr Fardell tried to persuade us that the present paragraphs 220A and 237A incorporate such an allegation of direct contravention of s47. They expressly relate to the “contravention by FCL and FCE” and refer to s83(1)(e) which is directed to contravention “by any other person”. There is thus no present pleading.
It was also advanced for the Commission that the trial court will be asked to infer that the Norcen and Western Mining acquisitions are to be regarded as parts of a single acquisition scheme or process so as to be treated as the one acquisition by which dominance or strengthened dominance resulted. After having acknowledged at the outset that this was not pleaded, Mr Fardell argued that the manner in which the "Kupe Acquisition” is defined in the statement of claim makes the position clear. The definition falls short of achieving that. Leave to amend was requested and was strongly opposed.
The grounds of opposition were that Robertson J had clearly drawn attention to the absence of a pleading capable of sustaining the inclusion of the Norcen acquisition as part of the contravening transaction; that amendment would result in, effectively, a new cause of action outside the limitation periods provided in ss83(5) and 85(2); and that it would constitute an attempt, post facto, to render unlawful the Norcen acquisition which when it was made was lawful and did not involve ECNZ – though this seems rather to beg the question.
This is a factually complex case, and there is no reason to consider it has been brought by the Commission other than responsibly. No doubt conscious of the need to plead conservatively or face inevitable requests for particulars in areas where most of the information is in the hands of the defendants, the Commission reasonably expects to replead after discovery. But to get to that point tenable causes of action must be alleged.
There are then two allegations sought to be introduced by amendment. The first is that Genesis contravened s47 when acquiring its interest in the Kupe field from ECNZ and became party to the contractual arrangements. Plainly the alleged dominance of the Fletcher group was neither created nor strengthened by that. For Genesis to contravene s47, subsec (1)(a) must be construed as covering not only the creation of dominance but also the perpetuation of dominance. But that construction would be inconsistent with its own terms and s48 which excludes from the operation of s47 the mere transfer of dominance. Of course, in its terms s48 would not take outside s47 an acquisition that left in place the dominance of a person other than the person making the acquisition under consideration, but it would be contrary to the spirit of s48 to construe s47 to impact upon an acquisition perpetuating third party dominance when it cannot impact upon an acquirer perpetuating dominance.
We hesitate, on a strike out, to adopt any narrowing construction of provisions designed to obstruct even the most resourceful market power builders, but we think it clear that s47(1)(a) is directed to acquisitions creating dominance and not those merely sustaining it. For this reason we do not see advantage in permitting amendment to allege direct contravention of s47 by Genesis. We add that since Genesis was not in existence at the time of the alleged contraventions of s47 by the Fletcher group, there is no justification for maintaining pleadings against Genesis on the first two causes of action. We will return to the remaining allegations against Genesis.
The second matter for which leave to amend is sought is the amalgamation of the Norcen and Western Mining acquisitions said to amount to contravention of s47 by the Fletcher companies in which ECNZ was knowingly concerned. We allow this amendment. The Commission, through its counsel has always made clear that it relies on the coincidence of timing of the two acquisitions and the resulting equalisation of interests with the Crown as supporting the inference of connection between the two acquisitions, and has clearly sought divestment in respect of both. What has been lacking is a clear pleading of the inference sought to be drawn. Presumably this stems from concern that if a plan or scheme is alleged particulars will be sought. But the matters already advanced, although of course not conclusive, would seem to support such an allegation pending discovery. This would make explicit what has been left unclear. It would not really introduce a new cause of action.
Certainly the Commission has had ample warning of the need to plead a composite acquisition or accept that the Norcen purchase is nothing more than background and immune from divestment. This must be recognised as the last chance to do so.
There remains the application to strike out Genesis from the proceedings entirely. As already said, we see no ground for maintaining against Genesis allegations of breaches of s47 directly or as a party. The third and fourth causes of action allege breaches of s27 by virtue of the contractual provisions said to have the purpose or likely effect of lessening competition in certain gas markets. One allegation against Genesis is of being party to breach by “FCE and/or ECNZ” the other is of being itself a party (as assignee) to the contracts.
Section 27 has continuing operation (unlike s47 which bites only on acquisitions) so the real issue as relates to Genesis is whether it is bound by the relevant contractual provisions (or perhaps otherwise is party to an understanding to the same effect). That was the subject of some argument before us with reference to particular contracts exhibited to affidavits. The transactions they embody are complex as is the matrix against which they are to be considered. At the strike out stage we have not been taken to the point of conviction that the allegations against Genesis are wholly untenable. They should be dealt with in the conventional way once all the facts are established.
While it seems tolerably clear that Genesis is not presently party to the Generic Gas Contract, it is presently bound to take an assignment. The FCE/ECNZ contractual rights and obligations may or may not have passed to Genesis with the whole of the interest of ECNZ in the Kupe field. That will be a matter for determination in due course. This is not the time to investigate the claim that Genesis seeks to distance itself from the contractual structure alleged.
Accordingly we are not prepared to strike out the s27 allegations against Genesis.
The Commission’s appeal is allowed only to the extent of granting leave to amend the claim as indicated in this judgment. The application by Genesis is allowed in part and the allegations against that company under s47 are struck out.
The appellant has succeeded only in obtaining the indulgence of leave to amend. Genesis has succeeded only in part. For costs in this Court the Commission is to pay to the first and second respondents together and to the third respondent $5,000 with disbursements including the reasonable travel and accommodation expenses of counsel approved if necessary by the Registrar. Genesis must meet its own costs.

Solicitors

M J Chapman, Wellington, for Appellant
Bell Gully, Wellington, for First and Second Respondent
I R Veale, Wellington, for Third Respondent
Rudd Watts & Stone, Auckland, for Fourth Respondent

[2000] NZCA 146

31 July 2000